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Berkshire Was Asked by SEC in June for Data on Derivative Bets
By Erik Holm
Nov. 21 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. provided more details on $37 billion of derivative bets after the U.S. Securities and Exchange Commission asked in June for ``more robust disclosure'' on how it values the contracts.
Berkshire doesn't have to buy the securities that underlie the derivatives, the Omaha, Nebraska-based firm said in an October 3 letter to the SEC released today. A subsequent SEC letter to Berkshire, dated Oct. 7, said its review of the company was completed, with no further comments.
The SEC contacted Berkshire Chief Financial Officer Marc Hamburg with the request for more information before investor concern about the derivatives, a bet on the world stock markets, contributed to a 29 percent decline in the firm's shares in the past two weeks. The exchange of letters was released by the SEC today.
Hamburg told the SEC in July that the company values derivative contracts using a model that includes equity prices, interest rates, market volatility and the dollar's performance against other currencies -- language the firm repeated in subsequent quarterly filings. The response was part of a four- month long exchange of letters that also concerned Berkshire's fixed-income investments and its insurance operations in Europe.
Jackie Wilson, a spokesman for Berkshire, didn't immediately return an e-mail seeking comment. John Nester, a spokesman for the SEC, declined to comment.
Derivative Bets
Buffett sold the derivative contracts to undisclosed buyers for $4.85 billion to protect them against declines in four stock markets, including the Standard & Poor's 500 Index.
Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements. By Sept. 30, Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter.
``I believe these contracts, in aggregate, will be profitable,'' Buffett said in a statement in May, reiterating comments from his letter to shareholders in February. ``We are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run. That is our philosophy in derivatives as well.''
The SEC also asked for information about Berkshire's stake in Moody's Corp., the ratings firm. Connecticut's attorney general said in May he was investigating possible conflicts concerning Berkshire's bond-insurance unit and its ownership of Moody's stock.
Berkshire said in its response to the SEC that it ``could not control or significantly influence the management or operating practices at Moody's.'' Berkshire paid about $2 million to Moody's last year for ratings services, Hamburg said in the letter.
Buffett, ranked the richest American by Forbes magazine, transformed Berkshire from a failing textile maker into an enterprise with businesses ranging from ice cream and underwear to corporate jet leasing.
To contact the reporter on this story: Erik Holm in New York at [email protected].
Last Updated: November 21, 2008 11:43 EST
By Erik Holm
Nov. 21 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. provided more details on $37 billion of derivative bets after the U.S. Securities and Exchange Commission asked in June for ``more robust disclosure'' on how it values the contracts.
Berkshire doesn't have to buy the securities that underlie the derivatives, the Omaha, Nebraska-based firm said in an October 3 letter to the SEC released today. A subsequent SEC letter to Berkshire, dated Oct. 7, said its review of the company was completed, with no further comments.
The SEC contacted Berkshire Chief Financial Officer Marc Hamburg with the request for more information before investor concern about the derivatives, a bet on the world stock markets, contributed to a 29 percent decline in the firm's shares in the past two weeks. The exchange of letters was released by the SEC today.
Hamburg told the SEC in July that the company values derivative contracts using a model that includes equity prices, interest rates, market volatility and the dollar's performance against other currencies -- language the firm repeated in subsequent quarterly filings. The response was part of a four- month long exchange of letters that also concerned Berkshire's fixed-income investments and its insurance operations in Europe.
Jackie Wilson, a spokesman for Berkshire, didn't immediately return an e-mail seeking comment. John Nester, a spokesman for the SEC, declined to comment.
Derivative Bets
Buffett sold the derivative contracts to undisclosed buyers for $4.85 billion to protect them against declines in four stock markets, including the Standard & Poor's 500 Index.
Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements. By Sept. 30, Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter.
``I believe these contracts, in aggregate, will be profitable,'' Buffett said in a statement in May, reiterating comments from his letter to shareholders in February. ``We are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run. That is our philosophy in derivatives as well.''
The SEC also asked for information about Berkshire's stake in Moody's Corp., the ratings firm. Connecticut's attorney general said in May he was investigating possible conflicts concerning Berkshire's bond-insurance unit and its ownership of Moody's stock.
Berkshire said in its response to the SEC that it ``could not control or significantly influence the management or operating practices at Moody's.'' Berkshire paid about $2 million to Moody's last year for ratings services, Hamburg said in the letter.
Buffett, ranked the richest American by Forbes magazine, transformed Berkshire from a failing textile maker into an enterprise with businesses ranging from ice cream and underwear to corporate jet leasing.
To contact the reporter on this story: Erik Holm in New York at [email protected].
Last Updated: November 21, 2008 11:43 EST
